Question for the folks that are retired.
when would annuities play a role in one’s retirement?
It is more like capital preservation.
Let’s say hypothetically that I only need my portfolio to increase 5% a year and don’t need the volatility of the Stock Market. Should one consider an income annuity for peace of mind?
or are there other stable ways of generating 5% a year, without too much risk?
Just my opinion…
… annuities should play a role in one’s retirement when one concludes they are too unmotivated, ill or otherwise unable/unwilling to learn to invest properly. My hope is that I retain my faculties to the day I die, but not everyone is so fortunate.
Rob
Annuities? Waiting until age 70 to collect Social Security effectively allows you to “buy” an annuity from the US Gov’t at a big discount to what a commercial insurer would charge for the same increase in monthly income. If you don’t understand the actuarial science, you’re likely leaving at least $100,000 on the table.
I wouldn’t touch an annuity sold by a commercial insurer with a 10 foot pole.
intercst
I keep 10 years’ worth of spending in cash and fixed income and the rest is in the stock market. That allows me to avoid selling during stock market down turns.
I too am a long-term buy and hold investor. After 30 years of retirement withdrawals and 50%+ stock market declines in 2000 and 2008, my portfolio has grown enough to make my annual withdrawal just 0.30% of assets for 2024, down from 4.00% in 1994 – and I’m waiting until 2026 to start drawing Social Security at age 70.
The biggest driver of my success was keeping what I lose to fees, commissions, trading costs and taxes as low as possible. I avoid financial advisors and annuity salesmen.
intercst
If you are ill with something that is killing you, you SHOULD NOT be looking into annuities. At least not the typical kind that has payments end at your death.
@darrellquock : Let’s say hypothetically that I only need my portfolio to increase 5% a year and don’t need the volatility of the Stock Market.
An alternative to an annuity which yields close to 5% but is also adjusted for inflation (which annuities are not) is the TIPS (Treasury Inflation Protected Security).
https://search.usa.gov/search?query=TIPS&utf8=✓&affiliate=treasurydirect&commit=
There is no commission to buy TIPS from Treasury Direct or from a Treasury auction on Fidelity. The marketplace is totally liquid so you can sell them if you need the cash back (unlike annuities). Like all bonds, TIPS return full principal if held to maturity but the price varies with prevailing interest rates if sold before maturity. A bond ladder of TIPS can be built by buying on the secondary market.
Currently, the 30 year TIPS yields 2.43% over inflation. The 30 year expected inflation rate is 2.43% (derived from the TIPS yield) but it could be either higher or lower. I think it will be higher due to the huge government deficits and other policies that will probably be inflationary.
I get peace of mind by avoiding the stock market when it’s in a historic bubble (POP!) and holding inflation-adjusted securities like TIPS.
The typical annuity (which terminates on death) is only worthwhile if you expect to live much longer than average, don’t expect to need the money for unexpected expenses (such as elder care) and don’t expect inflation in the future.
Wendy
The choice of an annuity at age 65 isn’t a good deal primarily because there is a lot of future unknown risks the insurance companies unwilling to take without a comfortable cushion. For a ~65 year old couple an annuity with a 2% annual increase to possibly cover some of inflation would only give you a ~4% income.
However, for an ~85 year old couple a similar annuity would give a ~7% income with a 2% annual increase. With the increased probability of one’s potential limited capability of either survivor managing their money this becomes more attractive.
Of course I wouldn’t ever buy an annuity because I know that neither my wife or I will ever have any limitations in the future like the significant number of out friends have had in their later years.
The way I see annuities is, buy yourself a pension, a guaranteed income. It has nothing to do with what return you will be earning. It has nothing to do with my ability to invest or to earn income or we will run out of money.
The way I see is, at some point in future SS will be mean tested, and/ or it could be reduced, may not keep up with inflation or even eliminated.
The last few years are good in the market. I am planning to buy an annuity with payout starting 5 years from now for $4K monthly payment until I am 85. That’s my life expectancy. 
This is same as SS (at current projected value). We will still have our investments growing, producing additional income. But, I know for sure I will have $4K per month.
Can I take the initial amount and double it next 5 years, 15% CAGR, and assume I can make 3% safe return and give myself $48 K, it will take 33 years to deplete the funds. So you can do better than Annuities? Yes, but there are many other variables, like I may not be able to do 15% CAGR, or able to earn 3% safe return, etc.
My family thinks that $4K is not going to make any difference and it is useless. I am like if I know for sure I will have $4K I can move to some other parts of the world and live with that money!!!
Not really. You will only have $4k the first month. Then for every month after that, you will have $4k minus inflation. If you are truly attempting to replace Social Security, then you will have to buy an inflation adjusting annuity, and those are more expensive than non-adjusting annuities.
This adds yet another variable. If the USA is in such dire straits as having to severely curtail social security, and you are using this $4k to replace it, then the US dollar will be in a decline. So your $4k might be worth 80,000 pesos the first year, and maybe 70,000 pesos the next year, and maybe 10,000 pesos in 10 years. Or worse, the US-based insurance company you bought the annuity from begins to fail and stops paying.
To piggyback on Mark, you may want to consider an immediate annuity that has some annual increase built into the income stream. Those do cost more.
Also note that there are likely thousands of different annuities; not only the companies that offer them but also the type (deferred, immediate, fixed, variable, indexed, buffered, etc.) with many that provide a guaranteed income by design (i.e. at no additional cost) while others charge you an annual fee for guaranteed income.
These can by very complex retirement solutions so I would encourage you to do your research before considering.
Years ago, I used to look at this site for comparisons. No idea if it is still good or if there may be a better resource: https://www.annuitygator.com/
Immediate annuities are commodity products. You can easily shop for the best rates. Keep in mind you are investing in the insurance company. Look for one that is rated by Ambest.
Many other annuity products are complex and not easy to compare.
Not fer nuthin’, but AIG was rated AAA in 2006, AA- in 2007, and oops, bankrupt in 2008. (Recapitalized by the US gvt) I assume any annuities they sold were taken over by state governments, but only to the limits of that protection (usually $250k, sometime higher, Puerto Rico domiciles $100k.)
I know insurance companies own all the biggest buildings in practically every city, but I still don’t trust them. Have they ever sold one to pay off policy holders? How do they end up with all that real estate?
Sweet…
How much of those gains are due to individual Motley Fool recommendations?
or are you an index fund investor???
Yep, no matter how careful you are nothing is guaranteed. But in the world of annuities look out for the low ball offer from an insurance company on its last legs. They’d love to get their hands on your money.
Actually, the fed bailout of AIG made it so states did not have to take over any annuities. They kept paying as usual.
Thanks for your thoughts…
After reading this thread and thinking things over, I will pass on purchasing annuities…
I think I would rather continue to dollar cost average into Index Funds and let the pile grow…whatever is left, at least my kids will have something… 
Your assumption would be incorrect. Some of this is from memory but the general facts are correct.
They did not go bankrupt and their annuity business was the most solid business they were in (it was all those unrelated mortgage derivatives that did them in). AIG sold their annuity business to Western & Southern and at some point after the financial crisis, bought those contracts back.
Customers that had AIG annuities did not lose a thing. In fact, their account numbers didn’t even change - only the name at the top of their statements (twice).
For the past 40 years, I’ve invested in mostly Tech and Drug stocks, DELL and Pfizer were big winners for me after I quit working in 1994. I’ve never bought any Motley Fool recommendations.
Over the past 15 years or so, I’ve been moving money to index funds and Berkshire Hathaway. But I still have about 40% of my money in Drugs. After holding it for 30 years, Eli Lilly is now about 20% of my portfolio.
intercst